Table of Contents
If you are in the business of farming, you can choose to deduct certain expenses for soil or water conservation or for the prevention of erosion of land used in farming. Otherwise, these are capital expenses that must be added to the basis of the land. (See chapter 6 for information on determining basis.) Conservation expenses for land in a foreign country do not qualify for this special treatment.
The deduction cannot be more than 25% of your gross income from farming. See 25% Limit on Deduction, later.
Ordinary and necessary expenses that are otherwise deductible are not soil and water conservation expenses. These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil.
You must include in income most government payments for approved conservation practices. However, you can exclude some payments you receive under certain cost-sharing conservation programs. For more information, see Agricultural Program Payments in chapter 3.
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Business of farming
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Plan certification
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Conservation expenses
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Assessment by conservation district
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25% Limit on deduction
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Choosing to deduct
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Sale of a farm
For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as owner or tenant. You are not farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. You are not farming if you are engaged only in forestry or the growing of timber.
Example.
You own a farm in Iowa and live in California. You rent the farm for $125 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. You cannot deduct your soil conservation expenses for this farm. You must capitalize the expenses and add them to the basis of the land.
You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. Keep a copy of the plan with your books and records to support your deductions.
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NRCS individual site plans. These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland.
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NRCS county plans. These plans include a listing of farm conservation practices approved for the county where the farmland is located. You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan.
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Comparable state agency plans. These plans are approved by state agencies and can be approved individual site plans or county plans.
You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. These expenses include, but are not limited to, expenses for the following.
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The treatment or movement of earth, such as:
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Leveling,
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Conditioning,
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Grading,
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Terracing,
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Contour furrowing, and
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Restoration of soil fertility.
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The construction, control, and protection of:
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Diversion channels,
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Drainage ditches,
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Irrigation ditches,
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Earthen dams, and
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Watercourses, outlets, and ponds.
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The eradication of brush.
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The planting of windbreaks.
You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. These expenses are added to the basis of the land.
In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that:
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Covers expenses you could deduct if you had paid them directly, or
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Covers expenses for depreciable property used in the district's business.
You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. The depreciable property must be used in the district's soil and water conservation activities. However, the following limits apply to these assessments.
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The total assessment limit.
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The yearly assessment limit.
After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. See Table 5-1 for a brief summary of these limits.
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The amount over 10% is a capital expense and is added to the basis of your land.
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If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense.
Example 1.
This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. Of the assessment, $1,500 is for digging drainage ditches. You can deduct this part as a soil or conservation expense as if you had paid it directly. The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. The total amount assessed by the district against all its members for the depreciable equipment is $7,000.
The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. The $200 excess ($900 - $700) is a capital expense you must add to the basis of your farm.
To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. Add $500 to the result for a total of $570. Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). You can deduct the balance at the rate of $70 a year over the next 9 years.
You add $70 to the $1,500 portion of the assessment for drainage ditches. You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later.
Example 2.
Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. The total amount assessed by the district against all its members for depreciable equipment is $5,500. The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550.
The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later.
Table 5-1. Limits on Deducting an Assessment by a Conservation District for Depreciable Property
Total Limit on Deduction for Assessment | Yearly Limit on Deduction for Assessment | Yearly Limit for All Conservation Expenses |
10% of: | $500 + 10% of: | 25% of: |
Total assessment against all members of the district for the property. |
Your deductible share of the cost to the
district for the property. |
Your gross income from farming. |
• No one taxpayer can deduct more than 10% of the total assessment.
• Any amount over 10% is a capital expense and is added to the basis of your land. • If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. |
• If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your
deductible share of the cost.
• You can deduct the remainder in equal amounts over the next 9 tax years. |
• Limit for all conservation expenses, including assessments for depreciable property.
• Amounts greater than 25% can be carried to the following year and added to that year's expenses. The total is then subject to the 25% of gross income from farming limit in that year. |
The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year.
Example.
In 2007, you have gross income of $16,000 from two farms. During the year, you incurred $5,300 of deductible soil and water conservation expenses for one of the farms. However, your deduction is limited to 25% of $16,000, or $4,000. The $1,300 excess ($5,300 - $4,000) is carried over to 2008 and added to deductible soil and water conservation expenses made in that year. The total of the 2007 carryover plus 2008 expenses is deductible in 2008, subject to the limit of 25% of your gross income from farming in 2008. Any expenses over the limit in that year are carried to 2009 and later years.
You can choose to deduct soil and water conservation expenses on your tax return for the first year you pay or incur these expenses. If you choose to deduct them, you must deduct the total allowable amount in the year they are paid or incurred. If you do not choose to deduct the expenses, you must capitalize them.
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Your name and address.
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The first tax year the method or change of method is to apply.
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Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply.
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The total expenses you paid or incurred in the first tax year the method or change of method is to apply.
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A statement that you will account separately in your books for the expenses to which this method or change of method relates.
address.
Department of the Treasury
Cincinnati Submission Processing
Cincinnati, OH 45999
If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers.
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